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  • Weekly global market focus
  • Washington prospects look better for a CR and debt ceiling deal
  • Last Friday’s soft U.S. unemployment report keeps Fed policy in a dovish light
  • U.S. stocks remain resilient

Weekly global market focus — The U.S. market focus this week will be on (1) the return of Congress from its August recess with an imperative to pass a spending bill by Sep 30 and a debt ceiling increase by early to mid-October, (2) five appearances by Fed officials this week as the market continues to assess the odds for a rate hike by year-end, and (3) further assessment of economic fall-out from Hurricane Harvey and whether gasoline prices can start to ease after last week’s upward spike.

This week’s U.S. economic calendar is fairly light with key reports including (1) today’s July factory orders report (expected -3.2% after June’s +3.0%), (2) Wednesday’s July U.S. trade deficit (expected -$44.6 billion vs June’s -$43.6 billion), (3) Wednesday’s Aug ISM non-manufacturing index (expected +1.5 after July’s -3.5), and (4) Wednesday’s Fed Beige Book report.

In Europe, the focus will mainly be on Thursday’s ECB meeting where the ECB will finally delve into its QE plans for 2018.  Bloomberg last Friday reported that ECB members may not be ready to finalize their decision on QE tapering until as late as their December meeting.  The report was based on “euro-area officials familiar with the matter.”  The report said that the ECB governing council is in no rush to make a decision at this Thursday’s meeting and that the complexity of the matter may delay a decision even beyond the Oct 26 meeting.

However, the report also said that the ECB may announce some broad 2018 QE principles at either its September or October meeting, leaving the details for later.  A delay in announcing QE details would be negative for the euro and could help the ECB address its worries that the euro is showing too much strength.

The European markets will also closely watch the stepped-up campaign for the Sep 24 German national election.  The betting odds at PredictIt.org are an overwhelming 93% that Chancellor Merkel’s coalition will retain control of parliament and that Ms. Merkel will keep her job as German Chancellor.

The Chinese markets will focus on the run-up to the Communist Party Congress on Oct 18 where there will be a twice-a-decade leadership change.  The Oct 18 start date was finally announced last Thursday.  Chinese market conditions have recently been favorable with the Chinese stock market and the yuan showing strength.  The government’s deleveraging campaign remains on hold with Chinese interest rates moving mostly sideways.

The general thinking is that the government will try to ensure stable market conditions until the Party Congress.  After the Congress is over, however, the situation could turn more volatile if the government strengthens its deleveraging campaign or launches new reform measures.

 

 

 

Washington prospects look better for a CR and debt ceiling deal — This will be a busy week in Washington as Congress returns from its August recess.  Last week’s Hurricane Harvey disaster could make passage of a continuing resolution (CR) and a debt ceiling hike easier since Congress and the White House cannot afford the political heat of a government shutdown and potential Treasury default coming on the heels of such a large-scale disaster.

Indeed, the Washington Post last Friday reported that President Trump has dropped his demand for $1.6 billion of Mexican wall funding to be included in the Oct 1 CR, which will make Congressional passage of a CR and debt ceiling hike much easier.  However, Mr. Trump is still demanding that the wall funding be included in the spending bill that will have to be passed in December when an Oct 1 CR is expected to expire.

Congress needs to pass a CR by Sep 30 to avoid a partial U.S. government shutdown on Oct 1.  Congress needs to pass a debt ceiling hike by Sep 29 according to Treasury Secretary Mnuchin, but the Treasury’s actual X-date is a bit later at either Oct 2 or mid-October, according to the CBO, depending on spending levels and incoming tax revenues.

Tax reform is high on the Republican agenda for September.  The Big-6 (Cohn, Mnuchin, McConnell, Ryan, Brady, Hatch) are scheduled to meet on Tuesday to plot a course for trying to get tax reform done by year-end.

Last Friday’s soft U.S. unemployment report keeps Fed policy in a dovish light — Last Friday’s weaker-than-expected Aug payroll report of +156,000 (vs expectations of +180,000) kept Fed policy in a dovish light.  In addition, (1) June-July payrolls were revised lower by a total of -41,000, (2) the Aug unemployment rate rose +0.1 point to 4.4%, and (3) Aug average hourly earnings were unchanged at +2.5% y/y, which was weaker than expectations of +2.6%.  In addition to the mildly soft unemployment report, last Thursday’s PCE core deflator eased  to a 1-3/4 year low of +1.4% y/y, causing inflation to slip farther below the Fed’s inflation target of 2.0%.  The odds for a Fed rate hike by year end are currently at 48%, according to the Jan 2018 federal funds futures contract.

 

U.S. stocks remain resilient — The S&P 500 index last week rallied fairly sharply on reduced worries about a U.S. government shut-down or a Treasury default after Hurricane Harvey put pressure on Congress to avoid any big showdowns.  In addition, last Friday’s soft unemployment report kept Fed policy in a dovish light.  The market was also encouraged by reports that the ECB plans to go slow on QE tapering.  The VIX index last Friday fell to a new 3-1/2 week low of 10.13.

 

 

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